ROLE OF DOMESTIC AND FOREIGN DIRECT

INVESTMENG IN DETERMINING THE UNEMPLOYMENT

RATE OF PAKISTAN

BY
HEJAAB ZAHRA
ROLL NO. WMP-30
SESSION: 2016-2018

SUPERVISORS
MS. MARIA FAIQ JAVED
PROF. DR. ABDUL SALAM

DEPARTMENT OF ECONOMICS
UNIVERSITY OF THE PUNJAB
LAHORE
 ROLE OF DOMESTIC AND FOREIGN DIRECT

INVESTMENT IN DETERMINING THE UNEMPLOYMENT

RATE OF PAKISTAN

BY

HEJAAB ZAHRA

UNIVERSITY OF THE PUNJAB

A thesis submitted in partial fulfillment of

the requirement for degree of

M.Phill

In

Economics

DEARTMENT OF ECONOMICS

UNIVERSITY OF THE PUNJAB

LAHORE
`
 DEDICATION

I dedicate this research work to my teachers, parents and family members who

support me spiritually, financially and also motivate to do this work.

`
 TABLE OF CONTENTS
PAGE NO.
LIST OF TABLES ....................................................................................i
LIST OF FIGURES ..................................................................................ii
LIST OF ABBREVIATIONS ..................................................................iii
ACKNOWLEDGMENT ..........................................................................iv
ABSTRACT ...............................................................................................v
CHAPTER 1
INTRODUCTION.....................................................................................1
1.1 Significance of the Study ......................................................................4
1.2 Problem Statement ................................................................................6
1.3 Objectives of the Study .........................................................................6
1.4 Research Question ................................................................................7
1.5 Conclusion ............................................................................................7
CHAPTER 2
REVIEW OF LITERATURE ..................................................................8
2.1 Introduction ...........................................................................................8
2.2 Determinant of Unemployment ............................................................8
CHAPTER 3
ECONOMIC MODEL AND ECONOMETRIC METHODOLOGY ..24
3.1 Introduction ...........................................................................................24
3.2 Theoretical Framework .........................................................................24
3.3 Model Specification ..............................................................................27
3.4 Description of Variables and their Relationship with
Unemployment Rate ...................................................................................28
3.4.1 Foreign direct Investment (FDI) ............................................28
3.4.2 Domestic investment (DI) ......................................................29
3.4.3 Money supply (M2) ...............................................................30
3.4.4 Population Growth (Popgr) ....................................................30

`
 3.4.5 Exports of Goods and Services (EXP) ...................................31
CHAPTER 4
ECONOMETRIC METHODOLOGY ...................................................32
4.1 Introduction ...........................................................................................32
4.2 Econometric Model ...............................................................................32
4.3 Unit Root Test .......................................................................................33
4.3.1 Hypothesis..............................................................................34
4.4 The Augmented Dickey Fuller Test (ADF) ..........................................34
4.4.1 Hypothesis..............................................................................35
4.5 Cointegration.........................................................................................35
4.6 The Autoregressive Distributed Lag (ARDL) ......................................36
4.7 Vector Error-Correction Models (VECM)............................................37
4.8 Conclusion ............................................................................................37
CHAPTER 5
RESULTS AND DISCUSSION ...............................................................38
5.1 Introduction ...........................................................................................38
5.2 Empirical Results and Discussion .........................................................38
5.2.1 Descriptive Statistic ...............................................................38
5.2.2 Unit Root Test ........................................................................39
5.2.3 Autoregressive Distributed Lag Cointegration Test ..............41
5.2.4 ARDL Bound Testing Approach ...........................................41
5.2.5 Estimated long run coefficients using the ARDL
approach: .........................................................................................42
5.2.6 Short run Dynamics ...............................................................44
5.3 Diagnostic Testing ................................................................................45
5.4 Conclusion ............................................................................................48
CHAPTER 6
CONCLUSIONS AND POLICY RECOMMENDATIONS .................49
6.1 Introduction ...........................................................................................49
6.2 Conclusion ............................................................................................49
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 6.3 Policy Implications ...............................................................................51
6.4 Limitations of Study .............................................................................51
6.5 Recommendation for Future Research..................................................52
REFERENCES .........................................................................................53
APPENDIX A ..........................................................................................61
APPENDIX B ...........................................................................................64
APPENDIX C ............................................................................................65

`
 LIST OF TABLES

Tables No. Titles Page No.

Table 5.1: Descriptive Statistic 39
Table 5.2: Unit Root Test 40
Table 5.3: ARDL Bound test Results 42
Table 5.4: Long run Coefficients 42
Table 5.5: Short run Results 45
Table 5.6: Diagnostic Testing 46

i
 LIST OF FIGURES

Figures No. Titles Page No.

Figure 3.1: Unemployment Rate in Pakistan 26
Figure 3.2: The role of macroeconomic variables in the 27
determination of unemployment of Pakistan
Figure 5.1: Cumulative Sum of Recursive Residuals 47
Figure 5.2: Cumulative Sums of Squares of Recursive Residuals 47

ii
 LIST OF ABBREVIATIONS

UNEM Unemployment rate

FDI Foreign direct investment

DI Domestic Investment

GDP Gross Domestic Product

EXP Exports

POPgr Population growth

M2 Money supply

ADF Augmented Dickey Fuller Test

ARDL Autoregressive Distributed Lag Model

JB Jarque-Bera test

VECM Vector error correction mechanism

iii
 ACKNOWLEDGEMENTS

In the name of Allah Almighty who grant me this opportunity and make me

able to proceed this research work successfully. This work in present state is due to

help and guidance of some people. Here I would like to ask thanks to all of them.

I would like to express my sincere gratitude to my supervisor miss Maria Faiq

(Assistant lecturer of economics) and Dr. Abdul Salam for kind supervision and prof.

Mumtaz Anwar chaudary (Chairperson of Economics Department) for supervision

and guidance in my M.Phill thesis. Here I am very grateful to all my teachers

specially Arif Ali Arif (headmaster of high school) in earlier studies.

I would like to say thanks to my parents and other family members who

provide me the opportunity and support me spiritually and financially. I would also

like to ask thanks to my colleagues for the cooperation in my study.

At the end but not least I am very glad to my dear fellows for giving me a

good accompany during this research work and special thanks to Sumaira Arshad for

providing me their wonderful help in my study.

iv
 ABSTRACT

This research is aimed at investigating the role of foreign direct investment and

domestic investment in determining the unemployment rate of Pakistan over the

period from 1974 to 2016. This study also explores the impact of population growth,

exports and money supply on unemployment in Pakistan. This study employs

different econometric techniques i.e. Unit root test, Augmented Dickey Fuller test

(ADF) and Autoregressive Distributed Lag Model (ARDL). Apart from these

techniques various diagnostic tests are utilized to check the reliability of results. This

study finds that population growth, exports and money supply negatively affect the

unemployment rate of Pakistan. The estimates spotlight a vital role of domestic

investment in reducing the unemployment rate of Pakistan. The results revealed that

domestic investment possess a negative relationship with unemployment rate, whereas

foreign direct investment shows positive relationship with unemployment rate. The

results suggest that foreign direct investment cannot help in reducing the

unemployment rate in Pakistan.

Key Words: Unemployment, Domestic investment, FDI, population growth, exports,

money supply

v
 CHAPTER 1

INTRODUCTION

Unemployment is an international phenomenon irrespective of developed or

developing countries. However, the intensity of unemployment differs among nations.

Poor nations are badly stuck in to the problem of unemployment. The consequences

of unemployment includes; decline in productivity, loss of income for the worker and

fall in the human capital in an economy (Arslan and Zaman, 2014). Unemployment

occurs when workers are willing to work but they could not find a job. In the views of

neoclassical economists the unemployment occurs when rigidities are imposed on the

worker’s market from outside market mechanism (Arslan and Zaman, 2014).

Keynesian economics indicate inefficiency of market and ineffective demand of

goods and services as major causes of unemployment (Arslan and Zaman, 2014).

According to the report of IMF unemployment is annually measured as the percentage

of the labor force which can’t search a job (Arslan and Zaman, 2014). International

Labour Organization (2001) takes unemployment as the situation when workers

remain unsuccessful in finding a job continuously for last four weeks. Those people

who have skills and willingness to do work but there is less opportunities to acquire

job are in the list of unemployed. According to the BLS (Bureau of labour statistics),

a person can be considered as worker’s age is above sixteen years, able to work for

their employer and not hired in the self-service such as housewife. For those people

who are unemployed and not engaged in any job activity and they were available for

the employers, but unable to get the job successfully. There are basically three types

of unemployment i.e; cyclical unemployment, frictional unemployment and structural

unemployment.

1
 High rate of unemployment indicates the wastage of potential resources of

economy. There is problem of unemployment in developing nations particularly after

global economic slowdown. More than 197 million people globally were without

work or 6% of world’s labor force were without jobs in 2012 (ILO, 2012).

Since, the severity of unemployment rate among the developing nations,

researcher take keen interest in solving this issue. One of the major solution of this

problem is prescribed as the foreign direct investment. The inflows of foreign direct

investment in host nation creates new job opportunities, it fills the gap between

modern methods of production and old methods of production and it also introduces

new techniques of production. The theory of modernization represents foreign direct

investment as a growth factor because growth needs investment (Adams, 2009).

Growth theories focused on transfer of technology through foreign direct investment

(Calvo and Robles, 2002). The traditional debate takes foreign direct investment as

the enhancing agent to employment and growth of the economy. Foreign direct

investment may pose favorable distributional and social impact on host developing

nations (Hill and Athukorala, 1998). The foreign direct investment brings the

productive resources in the host country which shows a positive impact on the

employment opportunities. Foreign direct investment also enhance transfer of

technology, encourages the creation of new jobs, and boosts overall economic growth

in host economy. Foreign direct investment encourages the competition between local

and foreign industry. The local firms are encountered to utilize the existing natural

resources efficiently and adopt advanced technology for earning profits (Wang and

Blomstrom, 1992; De Mello, 1997 and 1999).

The recent trends of globalization are encouraging the developing countries to

increasingly focus on how to attract more and more foreign direct investment.

2
Number of countries like Korea, China, Malaysia, and Singapore has blossomed from

investment abroad (Khan and Zahra,2016). The situation changed a bit during

financial crisis in 2007. World foreign direct investment inflows deteriorated by

11.7% followed by a more sudden collapse of 3.2% in 2008 and 2009 subsequently.

But in 2010 again foreign direct investment stabilized and reached the level of 4.9%

(Khan and Zahra,2016). However, dependence theory argues that foreign direct

investment can produce adverse impact on income and growth because it provides

opportunities to establish the monopolies in the country (Chase and Bornschier,

1985). Foreign direct investment invested from developed countries into developing

economies is mostly capital or technology intensive that may have crowding-out

effect on the economies of host countries (UNCTAD, 2006). Some types of foreign

direct investment create fewer job opportunities (Qiu and Wang, 2011). Nevertheless

foreign direct investment is still considered an important factor in enhancing

economic growth (Al-Tarawneh, 2004).

Pakistan is a developing nation and foreign direct investment is expected to play

positive role in promoting growth and development. However, its performance is very

low in attracting foreign direct investment (Khan and Kim, 1999). The flow of foreign

direct investment in Pakistan is concentrated in few areas. In 1997 Pakistan accounted

for 0.2% of foreign direct investment from overall the world, less than 1% of

developing nations. In 1975 the unemployment is 0.34% and domestic investment is

6.85 percent. While in 2001 the unemployment is 7.82% and domestic investment is

4.44%. In the year 2008 the unemployment is 5.46% and domestic investment is

4.58%. According to present situation, more than 3 million people are unemployed in

Pakistan and unemployment ratio is more than 12% (Khan and Kim, 1999). The

Unemployment Rate of Pakistan decreased to 5.79 % in Jun 2018, from the

3
previously reported figure of 5.94 % in Jun 2015. The Unemployment Rate of

Pakistan is updated yearly, available from Jun 1980 to Jun 2018, with an

average rate of 5.55 %. The data reached at highest of 8.27 % in Jun 2003 and

a reported low of 3.04 % in Jun 1986. The data is reported by Pakistan Bureau

of labor Statistics.

Unemployment is a major problem in the history of Pakistan. There is loss of

abilities or national talent of Pakistan’s youth due to the effects of unemployment

(Sumera, 2012). According to the Labor Survey of Pakistan for 2008-09, the rate of

unemployment has risen from 52% to 55% (Khalil, 1999). In Pakistan there are many

causes of unemployment. A huge literature has been emerged at this problem

(Aurangzeb and Asif,2013; Djambaska, 2015; Mehmood et al. 2014).The government

and policy makers should focus on this critical issue because it affect not only the

society but also the economic activities(Mortimer,2013).

There are many studies on exploring the determinants of unemployment rate

of Pakistan. Few studies discuss the impact of foreign direct investment or domestic

investment on unemployment rate of Pakistan (UNCTAD,2013; Mucuk and

Tahir,2013). But there is hardly any study that incorporates the effect of both foreign

and domestic investment on unemployment rate of Pakistan. The present study will

fill this gap using guidelines of previous studies that makes it a healthy contribution

towards the respective literature.

1.1 Significance of the Study

Unemployment provides the underutilization of labor force (Sumera, 2012).

Unemployment is the problem which is faced by both developed and developing

countries. According to the recent statistics, approximately the labor force

unemployed ratio is 5.95 percent in Pakistan. The world data bank provide data from

4
1980-2008. The average value for Pakistan during that period was 4.73 percent with a

minimum of 2.6 percent in 1990 and maximum of 7.8 percent in 2002. The total

number of unemployed people rose by 280000 during past year to 3.4 million. There

is dire need to decrease the unemployment for development of our economy.

Domestic investment alone is not sufficient to provide employment opportunities to

all of masses. So, foreign direct investment seems a great opportunity to fill the gap of

investment and raising employment opportunities (Craigwell,2006; Zeb et al. 2014).

But present literature remain doubtful in effectiveness of foreign direct investment in

reducing the unemployment rate (Ismail and Latif,2009; Rizvi and Nishat,2009).

Foreign direct investment plays a significant role in the economic growth of a

developing nation. It also boost up the new job opportunities, introduce the advanced

technology and enhance the economic growth in the host nation. In the availability of

foreign firms, a competitive environment may develop. Hence, local firms are boost

up to utilize the existing resource in efficient way and also adopt advanced

technologies(Wang and Bloomstrom, 1992;De Mello,1997 and 1999). In 1975 the

unemployment is 0.34% and domestic investment is 6.85 percent. While in 2001 the

unemployment is 7.82% but domestic investment is 4.44%. In the year 2008 the

unemployment is 5.46% and domestic investment is 4.58%(WDI). Rising foreign

investment and fluctuating unemployment rate makes Pakistan an interesting case

study. Many studies target either domestic or foreign direct investment to affect

unemployment rate in Pakistan (Zeb et al. 2014; Arslan and Zaman, 2014; Aurengzeb

and Asif , 2013; Munnel and Ricardo, 2000). But, there is hardly any study that

incorporates both domestic and foreign investment effect on unemployment rate of

Pakistan. This study will examine and compare the impact of both domestic and

5
foreign investment for effecting unemployment rate of Pakistan. This uniqueness

signifies the existence of this study.

1.2 Problem Statement

Past few decades, the increasing rate of unemployment is become a bigger

issue of developing as well as developed nations. This research focuses on the

unemployment rate of Pakistan over the period from 1974 to 2016. The core factors

under consideration are domestic and foreign direct investment, while the other

factors include population growth rate, monetarization and exports of our country.

The basic purpose is to identify those factors that can reduce the unemployment rate

of Pakistan.

1.3 Objectives of the Study

Unemployment is the basic problem of developing countries. Labour is the

potential resource of Pakistan economy as 2 million people will enter in labour force

each year in coming 10 years (Haq, 2017). Unemployment causes the loss of national

talent in Pakistan (Sumera, 2012). The highest unemployment rate in the history of

Pakistan is 7.80. Huge investment is needed to produce jobs for unemployed labour

force. The domestic investment may be the major source for job provision

(UNCTAD,2013). Foreign direct investment may also be helpful in job creation and

promoting the domestic investment (UNCTAD,2013; Shaari et al.2005; Sarwar and

Habib,2013). This study will investigate the impact of both domestic and foreign

direct investment on unemployment rate of Pakistan for the period of 1974 to 2016.

The major objectives of this study are as follows:

• To explore the impact of foreign direct investment on unemployment rate of

Pakistan.

6
 • To find the impact of domestic investment on unemployment rate of Pakistan

• To explore the effect of money supply, exports and population growth on

unemployment rate of Pakistan.

• To identify those factors that can assist in reducing unemployment rate of

Pakistan.

1.4 Research Question

 Is there long run relationship among unemployment, domestic investment,

foreign direct investment, money supply, exports and population growth?

 What is the magnitude of long term relationship among unemployment and

domestic investment, foreign direct investment, money supply, exports and

population growth?

 Can foreign direct investment help in reducing the unemployment rate of

Pakistan?

1.5 Conclusion

In conclusion, this chapter is briefly defined the background, objectives of

study and significance of the study. This study is to explore the relationship among

the unemployment rate and other macroeconomic variables such as foreign direct

investment, domestic investment, money supply, exports and population growth. The

review of literature will be discussed in next chapter.

7
 CHAPTER 2

REVIEW OF LITERATURE

2.1 Introduction

The basic aim of this chapter is to have main concepts on determine the

variables and appropriate technique. This chapter 2 review the literature that conduct

by other researchers and they investigate the relationship between unemployment,

FDI, domestic investment, money supply, exports and population growth.

2.2 Determinant of Unemployment

A lot of studies have been done to explain the foreign direct investment and

unemployment association along with the other variables such as domestic

investment, money supply, exports and population growth in various context and

regions. An overview of some of these works is given here:

Foreign direct investment is essential to enhance the level of employment. In

developing countries unemployment is a major problem. To minimize the

unemployment level there is too much need of foreign direct investment to create

more jobs opportunities. According to 2006 World Investment Report (United

Nations Conference on Trade and Development (UNCTAD), 2006), the UNCTAD

has exhibit that most of the foreign direct investment invested from developed

countries into developing economies is capital or technology-intensive, and that it has

a crowding-out effect on the economies of host countries. After analyzing the

relationship between FDI and employment, some researchers have reported that the

effect of FDI on employment is positive, while some researchers doubt this point. A

detailed discussion of this divergence of views follows.

8
 Van Loo. (1977) explained the impact of foreign direct investment on total

investment/domestic investment in Canada. This study is done by first considering

ways in which FDI effects domestic investment in both indirectly and directly. The

estimates of this study suggest that there is positive relationship between FDI and

domestic investment through the direct effect but the domestic investment is smaller

due to negative indirect impact.

Population growth rate is assumed to have a positive impact on

unemployment. Hollister and Goldstein (1994) explored that the high population

growth rate resulted in increase in supply of labour force. As a result, the

unemployment rate decreases. However, in the low populated countries, the results

may be different.

Lipsey (2000) studied that the inward foreign direct investment is negatively

related to Domestic investment in the OECD countries. While indirectly the foreign

direct investment effects economic growth through increasing the stock of human

capital in the host country. The larger the aggregated knowledge, the faster advanced

technological progress because the innovation cost decrease as the level of knowledge

increase (Campos and Kinoshita, 2002; Findlay, 1978; Wang, 1990).

The impact of GDP growth, inflation and foreign direct investment was

studied on unemployment rate of China over a period 1982-2014. We employed the

autoregressive distributed lag (ARDL) bounds testing approach by Pesaran et al.

(2001). Long term results show that there is a statistically negative relationship

between GDP and the unemployment rate. Inflation rate has positive effect on

unemployment. Foreign direct investment has positive effect on unemployment. Short

term results show that there is a statistically negative relationship between GDP and

the unemployment rate. Inflation rate has negative effect on unemployment.

9
 Egger and Winner (2005) investigated a clear positive relationship between

FDI and corruption. They found that in the existence of regulations and other such

restrictions, corruption can act as a so-called “helping hand”.

Chang (2006) explored the relationship between trade, economic growth,

foreign direct investment and unemployment in Taiwan. This study utilized impulse

response function and VAR technique of variance decomposition. The result shows

that there is positive impact of economic growth and exports on foreign direct

investment inflow but export has negative impact on foreign direct investment

outflow. This study also found that there was no relationship between foreign direct

investment and unemployment in Taiwan.

Jayaraman and Singh (2007) studied the relationship between employment and

FDI through a multivariate modeling strategy for Fiji. This study found that both FDI

and GDP have positive significant impact on employment in Fiji. Granger causality

testing technique explored the direction of causation among variables and examined

unidirectional causality running from employment to Foreign Direct Investment in the

long run and unidirectional causality running from FDI to GDP in short run.

Berument et al. (2008) explored that many economies shocks result by

external and domestic causes effected the industrial sector of the Turkish economy.

Since the economic condition has been recovered from crisis, the level of

unemployment still remains high and this situation is called “jobless growth.” This

study found that the GDP growth rate has decreased and it lead to rise in the

unemployment.

Andrei et al (2009) investigated that there is a negative correlation between

growth of real Gross domestic product and unemployment. They explored that there is

correlation between real Gross Domestic product and unemployment. It is very

10
important for policy makers to obtain a sustainable increase in living standards. If

Gross domestic product growth rate decrease below the natural rate, it implies that the

policy makers will boost the employment to increase the total income which will

generate inflationary pressures. In another side, in order to maintain sustainable

growth rate without generating inflation in the market, if the GDP increase above its

natural rate than policy makers will not increase the creation of new employment

opportunities. This study found that there is negative relationship between Gross

domestic product and unemployment which means that if GDP growth is low in the

economy than the unemployment will increase in that economy.

Akhtar et al. (2009) utilized the VAR technique for the purpose of

determining the interrelationship between export, foreign direct investment,

unemployment and gross domestic product in Turkey. This paper used the data from

period 2000 to2007. The estimate explored that foreign direct investment did not

decrease the unemployment in Turkey. The export has positive impact on GDP

growth but it is insignificant.

Wright et al. (2009) examined the relationship between money supply, interest

rate and unemployment in the long run. The result found that these variables are

positively related with eachother but with low frequencies.

Ismail and Latif (2009) examined that the interrelationships among

unemployment, Foreign Direct Investment, exports, and Gross Domestic Product by

applying impulse response function and VAR technique of variance decomposition

for the period of 2001:1 to 2007:4 in Turkey. The study explored that Foreign Direct

Investment does not have any impact on unemployment rate in Turkey.

Karlsson et al. (2009) also examined the impacts of Foreign Direct Investment

on employment in manufacturing sector of china. The sample comprised of time

11
series data from the years 1998 to 2004. They found foreign direct investment having

positive direct effects on growth of employment. The estimates also showed that

Foreign Direct Investment has positive indirect effect on employment in private

domestic firms of Chinese economy.

Rizvi and Nishat (2009) described the impact of foreign direct investment on

employment opportunities in China, Pakistan and India. This study utilized the data

from time period 1985-2008. The Im-Pesaran-Shin (IPS) unit root approach was used

to check order of integration. Pedroni (1999) approach of panel co-integration applied

is to check the relationship in the long run. This study also applied seemingly

unrelated regression (SUR) method to investigate the impact of foreign direct

investment on employment in the above mentioned economies. Estimates showed that

foreign direct investment does not create a direct impact on employment level in

China, India and Pakistan. This paper also studied that besides FDI encouragement

policies, other measures should be taken to enhance growth of employment.

According to the research of Feldmann (2011), he concluded that the many

researchers says that when there is high exchange rate than the unemployment rate

ultimately will high. But some other says that it depend on the characteristics of labor

market. This study found that if company will improve the bargaining position of

workers which is increase in salary thus it will decrease the net return of a company.

Due to this the company does not hire new workers so it postponed which leads to

high unemployment by using GARCH test. This study found that there is positive

relationship between exchange rate and unemployment.

Haug and king (2011) described that previous study had two forces to support the

impact of money growth which is opposite direction with level of unemployment.

First is the search inducing effect which is the high inflation which leads to consumers

12
purchase more intensively thus it will boost up the firm sales than it decreases the

unemployment. The second one is the effect of inflation that high inflation will bring

down the profitability, values of sales and opportunities of new hiring labor force.

They found that inflation and unemployment has positive relationship. However these

estimates may shows that there is unambiguous relationship in the long run. This

study has used the quarterly data of US from 1952Q1-2010Q1. The result explored

that there is positive relationship between inflation and unemployment in the medium

to long run.

Muritela(2011) examined the impact of inflation and investment on economic

growth performance in Nigeria. This study also examine the trend analysis

investment and inflation in Nigeria from 1981-2006 by using the Ordinary Least

Square method. The aim of this study is to find the long run relationship among

inflation, investment and economic growth. The result showed that there is negative

relationship between inflation real GDP while there is positive relation between Gross

capital formation and real GDP. The increase in investment will lead to rise in

consumption also increase labor, increase productivity, increase outcome therefore the

economic performance will improve because there is decrease in capital flight.

Chimnani et al. (2012), they explored that there is positive relationship

between exchange rate and unemployment. In addition, the exchange rate is the basic

problem for the Asian countries because these countries faced the deficit problem. It

is also an important element especially for the open market economy because it can

influence the level of import and export of a country. They said that if there is

increase in the exchange rate volatility than it will leads negative impact to the level

of import trade and due to that the unemployment issues happened. This study

concluded that there is positive relationship between exchange rate and

13
unemployment. So, if a nation can overcome their exchange rate level than they

would be able to minimize the level of unemployment.

Shaari et al. (2012) studied that the economists believes that the foreign direct

investment is a critical source for the development of an economy in the world. It also

found that foreign direct investment can reduce the level of unemployment of a

nation. When there is reduction in unemployment, the productivity level will enhance

and it will bring the economy condition perform better. They utilized the simple OLS

to test the relationship between the foreign direct investment and unemployment in

Malaysia by using the data from period 1980-2010 and the data collection source is

World Bank. This study found that there is negative relationship between FDI and

unemployment which means that if the level of FDI is increases than ultimately the

unemployment decreases.

Göçer et al. (2013) examined that foreign direct investment inflows and

exports had a negative long run impact on the unemployment rate. This study checked

the impact of exports and foreign direct inflows on unemployment rate in Turkey.

Nyahokwe and Newadi (2013) stated that the exchange rate has more influence on the

import, export employment and production. For the developing nations the exchange rate was

most focus issue because it may cause the high unemployment rate. Besides it, the

exchange rate may increase the level of unemployment if there is low investment in

physical capital. There are some other researcher who argued that there is positive or

negative relationship of exchange rate which is depend on specific characteristics of

an industry. This study used data from period 2000-2010 by using ADF test. The

estimate of VECM shows that there is positive relationship between exchange rate

and unemployment in the short run.

14
 Aurangzeb and Asif (2013) explained that the relationship between inflation

and unemployment in the economic theory called as Phillips curve that was developed

in 1958 and these two variables have negatively affected to eachother. In the journal,

there are few researches which investigated that there is relationship between inflation

and unemployment is ambiguous with various model and economic environment.

Therefore, the rising of purchasing price reduce definitely the demand will decline

and firm will decrease the production activity thus unemployment will rise. This

research on three countries namely china, India and Pakistan by using the data from

period of 1980-2009. This study found that inflation for India and Pakistan shows that

there is relationship between inflation and unemployment exists.

According to the Aurangzeb and Asif (2013), they investigated that the

exchange rate plays a vital role to better the economic condition of a nation because it

can influence the level of workers. The researcher says that as the inflow of foreign

currency increase, it will increase the growth of an economy thus the unemployment

will decrease. So, it can bring some advantages such as the level of labor force

increase, the productivity also will enhance thus it can boost up the import sector and

export sector expenditure will decreased. They do the research on three nations which

are India, Pakistan and china by utilizing the granger causality and Cointegration test

from the period 1980-2009. The results found that the exchange rate has positive

impact on the unemployment level for three nations. Besides that there is

unidirectional causality relationship between exchange rate and unemployment of

Pakistan.

Mucuk et al. (2013) studied the relationship between unemployment and

Foreign Direct Investments for seven developing nations namely Argentina, Chile,

Colombia, Philippines, Thailand, Turkey and Uruguay for the period of 1981-2009.

15
Panel co-integration and panel causality panel unit root, tests were performed for all

above following nations. Estimates explore that unemployment and foreign direct

investment move together in long run. Foreign direct investment enhance

unemployment in Turkey and Argentina while decrease it in Thailand. They also

investigated that negative effects of foreign direct investment on unemployment are

due to Brownfield investments because it creates less job opportunities so policy

makers should focus on Greenfield investments to create more employment

opportunities.

Sarwar and Habib (2013) explored that the impact of foreign direct investment

on employment level in Pakistan during the time period of 1970-2011. The variables

which are used in this study were FDI employment level, GDP level and exchange

rate. The study used Johansen test of Co-integration to investigate the long run

relationship among the variables. The study found that FDI has a positive significant

effect on employment level in Pakistan.

Yasuf(2013) stated that gross domestic product growth of Pakistan has

sluggish to a barely three percent rate that is politically and economically

unacceptable. The technological backwardness of the country, its low level of

industrialization, the domestic market scale and the youth bulge all suggest that is

punching below its weight. Therefore, there is much need of FDI into infrastructure

and industry that promotes the technology and diversification up gradation of exports

and helps to integrate Pakistani industry or firms more closely with global supply

chains. During the medium term, the china’s foreign direct investment can indirectly

assist industrialization of Pakistan by helping to ease energy constraints and

transport. Besides, if much needed policies are implemented than Chinese foreign

direct investment will increase in manufacturing sector.

16
 Maqbool et al. (2013) described determinants of unemployment in Pakistan

over a period of 1976-2012. ARDL approach had been utilized to check the

determinants of unemployment. Empirical results shows that gross domestic product,

population, inflation and foreign direct investment were significant determinants of

unemployment in Pakistan in short run as well as long run.

Afghan et al. (2014) explored the relationship among interest rate, exchange

rate, trade and inflation in Pakistan and India. This study utilized the data from 1971-

2013. There is rise in the exchange rate will cause the cost push on imported items

than inflation will rise in the economy. When the inflation will high in the country

than the interest rate will also increase. The high interest rate will lead to low

investment in the country. In this paper the Autoregressive Distributed Lag model has

been used to check the effect of export, import, interest rate and inflation rate on

exchange rate. This study found that there is negative insignificant relation only by

inflation rate in Pakistan while positive insignificant only by inflation rate and interest

rate in India.

Cheema and Atta (2014) found the determinants of unemployment by

applying ARDL bound approach using the time series data from 1973 to 2010 in

Pakistan. The results indicated that unemployment had statistically significant positive

relationships with output gap, productivity and economic uncertainty while it had

statistically significant negative relationships with gross fixed investment and

openness of trade.

Aqil et al. (2014) explored that unemployment is not a good sign for an

economy for their perspective of economic and social. The researchers observed that

foreign direct investment can affect the technology transfer into the domestic firms

which can influence the employment level. It also explored that when there is no

17
foreign direct investment it means that the level of unemployment will increase. The

estimates showed that high value of adjusted R square explains that there is strong

relationship between foreign direct investment and unemployment. Therefore, it can

be explored that there is negative relationship between foreign direct investment and

unemployment. So, it means that the foreign direct investment can reduce the

unemployment.

Furuoka and Munir (2014) explored the relationship of inflation and

unemployment in Malaysia. According to the Phillips curve, it can be explained by

the concept of labor supply and demand. When the labors demand greater than labor

supply, it will give the pressure on the wage rate which will cause the high inflation of

a nation. So, workers can easily find the job and unemployment ultimately reduced.

On the other hand, when the supply of labor is more than demand of labor, it will

push down the salary rate thus it will decrease the inflation. Therefore when there is

excess supply of labor than it is difficult to find a job for workers hence the level of

unemployment will rise. This study used the Johansen Cointegration and ECM by

using the data from the period of 1975-2004. This study found that there is co-

integrated relationship in the long run and in the short run there is negative

relationship.

Zeb et al. (2014) described that foreign direct investment is a critical parts in

growth of an economy in developing nations. They also explored that the foreign

direct investment was able to supply the basic equipment like professional workforce

skill, modern technology and capital to those developing nations. This type of

equipment can help to create the new job hence it also can help to minimize the level

of unemployment and poverty of a nation. This study utilized the data from period

1995-2011 by using the Ordinary least square to check the relationship between

18
foreign direct investment and unemployment. The result suggested that there is

significant and negative relationship between FDI and unemployment. Hence, it can

conclude that when the level of FDI increases the level of unemployment decreases.

Based on the research of Stamatiou and Dritsakis (2014), they investigated the

relationship between foreign direct investment and unemployment in Greece by using

the data from 1970-2012. Since the global crises happened, many countries facing

high rate of unemployment. The economist believes that to reduce this problem there

is entire need of foreign direct investment because the FDI can increase the private

investment. It can also help to create new job opportunities and transfer of technology

or also enhance the knowledge of labor skills which directly boost up the economic

condition of an economy. They found the relationship between foreign direct

investment and unemployment and result shows that there is causality in short run and

in long run there bidirectional causality. So, the increase in foreign direct investment

will increase the growth rate and then ultimately the level of unemployment reduced.

According to the research of Gogos&Kosma (2014) the theory of Okun’s Law

explored that rise (fall) in production followed by rise (fall) in demand. The result

shows that there is short run relationship between proportional changes in Gross

Domestic Product growth and rate of unemployment. It also found that there is

negative and statistically significant relationship between unemployment and gross

Domestic product growth.

According to Alarmo and Al-dalaien (2014) described that most of the studies

found that there is negative relationship between unemployment and GDP. This

shows that rise in Gross domestic product will rise the employment rate and it will

further reduce the unemployment. However, the result explains that Gross domestic

product takes place in two directions. The first one is unemployment is decreasing

19
because of the rising in the productivity of labor that does not create of new jobs. The

second direction is that the rising in labor supply that brings to the creation of

additional jobs that further decrease the rate of unemployment in the economy. The

result also implies that the rate of unemployment is influenced by the Gross domestic

product.

According to the khalip et al. (2014), they explained the gap between real

GDP and potential GDP expand the variations in unemployment that are negatively

related to change in output called as Okun’s law. This Okun’law is related to the

variations in aggregate output and unemployment which is how much the gross

domestic product decrease when the unemployment is above its neutral level. This

study used the panel unit root test which shows that all variables are significant and

the results of pooled EGLS implies that the relationship between GDP and

unemployment is negative which means that rise in GDP will reduce the

unemployment.

A.M. Mehta (2014) explored the effects of macroeconomic variables on the

economic climate of Pakistan. The aim of this study is to explore the determinants of

the economic growth effected such as oil prices, Exports, FDI, Government spending,

inflation and real interest rate. These variables would boost up the outcome of

Pakistan. This study used the data from the period 2001 to 2010 by applying the Fixed

effect model. This study found that there is significant effect of these variables on the

economic environment of Pakistan. Foreign direct investment and exports has positive

correlation with the economic growth. The rise in the international oil prices has

negative effect on the economy in the shape of budgetary position and balance of

payment whereas real interest rate has negative impact on economy.

20
 According to Strat et al. (2015), they examined that the foreign direct

investment is one of best method to boost up the economic condition of developing

nations. Moreover, the foreign direct investment also act as important resources to

enhance the quality of goods and services whether in the external and internal market

such as enhance the exports level to increasing the economy potential. Besides,

foreign direct investment also can improve the management skills of a company. They

utilized the Toda Yamamoto method to test the short term causality relationship for

all 13 states of latest European union members. The study found that there are four

nations out of thirteen nations have significant impact net inflow of foreign direct

investment and unemployment. But at the same time, there are 3 countries also proved

that there is casual influence relationship exist between foreign direct investment and

unemployment.

Hadad (2016) stated the relationship in Jorden which is Arab country because

it has facing the problem of unemployment and poverty which cause the economic

slowdown. Besides, the study found that foreign direct investment can provide the

managerial skills, capital and advanced technology to the developing countries to

enhance the economic growth. Because when the foreign firms invest in an economy

then the new jobs opportunities are established and unemployment rate decreases then

ultimately the problem of poverty controlled. This study used the data from 1998-

2014 by using the ordinary least square to check the relationship. This study found

that there is significant and negative relationship between foreign direct investment

and unemployment.

Irpan et al. (2016) explained that there is entire need of economic growth to

Malaysia from other nations because it is a developing nation. Therefore, there is need

of foreign direct investment because its contribution is to a higher employment rate.

21
There is more contribution of FDI to increasing employment level of Malaysian

nation, due to higher level of employment increase the standard of living of

Malaysians while its growth rate also increased. This study explored the impact of

foreign direct investment on rate of employment in Malaysia. There are other factors

which included in this study such as GDP, the number of foreign workers and

exchange rate (EXCR). This study utilized annual data spanning from 1980 to 2012.

This study applied the Autoregressive distributed lag (ARDL) model to find out the

long run relationship among the variables. The results showed that number of foreign

workers, FDI and Gross Domestic Product has significant impact on the

unemployment rate in Malaysia.

Arshad and Ali (2016) studied the interrelationship of interest rate,

unemployment rate and inflation rate in Pakistan by using the data from period 1974-

2013. This study has been used the Autoregressive distributed lag model (ARDL) to

find the Cointegration among the variables which are given in the model. To find the

short run dynamics of the model vector Error correction model has been applied. This

study do not found that significance trade-off between inflation rate and

unemployment rate while in the short run there is trade-off of interest rate exist with

inflation rate and unemployment rate. The empirical result explored that exchange

rate and population growth rate have negative relation with unemployment whereas

external debt play a positive role in the determination of unemployment in Pakistan.

The main cause of inflation is money supply while imports and exchange rate have

negative contribution in inflation. There is positive impact of interest rate on domestic

credit to private sector while it is negatively related to exchange rate.

Population growth rate is another important indicator which is used to explain

the change in population and play a focal point in the economic development of a

22
nation. Rapid population growth can generate problem of food security, urban

congestion and environment problem and it is the major factor behind the

international migration. In Pakistan population growth rate has shown improvement

and it decreased from 2.0 percent in 2012 to 1.97 percent in 2013 and 1.95 percent in

2014.

23
 CHAPTER 3

ECONOMIC MODEL AND ECONOMETRIC METHODOLOGY

3.1 Introduction

This study investigates the role of macroeconomic variables in the

determination of level of unemployment in Pakistan. Therefore, this chapter explains

the theoretical relationship between unemployment rate and foreign direct investment,

domestic investment, money supply, exports and population growth in Pakistan. This

study used the data from period 1974 to 2016. The data has been collected from

secondary sources which are World Bank and economic survey of Pakistan. E-Views

9 was utilized as tool to analyze the data.

3.2 Theoretical Framework

Macroeconomic variables are very important to determine the condition of any

economy. In this part, the analysis investigates how the macroeconomic variables may

affect the unemployment in Pakistan. Unemployment is a major issue of both

developed and developing countries and it gives rise to many other undesirable social

activities in the country i.e; street crimes, suicide, burglary, theft and is a threat to the

national safety etc. It not only affect the individuals but also harmful for the whole

nation.The inflows of foreign direct investment in host nation creates new job

opportunities, it fills the gap between modern methods of production and old methods

of production and it also introduces new techniques of production. The theory of

modernization represents foreign direct investment as a growth factor because growth

needs investment (Adams, 2009). Growth theories focus on transport of technology

through foreign direct investment (Calvo and Robles, 2002). The traditional debate

takes foreign direct investment as the enhancing agent to employment and growth of

24
the economy. Foreign direct investment may pose favorable distributional and social

impact on host developing nations (Hill and Athukorala, 1998). The foreign direct

investment brings the productive resources in the host country which shows a positive

impact on the employment opportunities. Foreign direct investment also enhance

transfer of technology, encourages the creation of new jobs, and boosts overall

economic growth in host economy. Foreign direct investment encourages the

competition between local and foreign industry. The local firms are forced to utilize

the existing natural resources efficiently and adopt advanced technology for earning

profits (Wang and Blomstrom, 1992; De Mello, 1997 and 1999). However, if the

domestic investment are not capable of rising their efficiency then demand would fall

for their commodity and the possibility of shut down increases in the long run.

Therefore, foreign direct investment can lower the domestic investment and may

possess adverse effect on unemployment rate of Pakistan.

Number of countries like Korea, China, Malaysia, and Singapore has

blossomed from investment abroad (Khan and Zahra,2016). The situation changed a

bit during financial crisis in 2007. World foreign direct investment inflows

deteriorated by 11.7% followed by a more sudden collapse of 3.2% in 2008 and 2009

subsequently. But in 2010 again foreign direct investment stabilized and reached the

level of 4.9% (Khan and Zahra,2016). However, dependence theory explores that

foreign direct investment can produce adverse impact on income and growth because

it provides opportunities to establish the monopolies in the country (Chase and

Bornschier, 1985). Foreign direct investment invested from developed countries into

developing economies is mostly capital or technology intensive that may crowding-

out effect on the economies of host countries (UNCTAD, 2006). Some types of

foreign direct investment create fewer job opportunities (Qiu and Wang, 2011).

25
Despite the facts foreign direct investment is still considered to be an important factor

in enhancing economic growth (Al-Tarawneh, 2004).

According to Pakistan Bureau of Statistics, the population over 177 million

and according to Economic survey of Pakistan 2011-12, the rate of literacy in

Pakistan is fifty eight percent. In 2012 the foreign direct investment in Pakistan is

round about 532 million dollars whereas the Gross domestic product growth rate of

the country around 3.7 percent which has steadily decreased over the past decade.

Pakistan is a developing nation and is facing many social problems but unemployment

is the major one. In Pakistan the unemployment rate is 5.55 percent (Asif and

Shujat,2014). There are so many factors which affect the unemployment in Pakistan

but we could not incorporate all the macroeconomic variables in this study. Therefore,

the variables under this study are exports, money supply, population growth, foreign

direct investment and domestic investment, the relationship of these factors with

unemployment rate is briefly discussed in this section. The figure 1.1 provides an

overlook to the existing situation of unemployment rate of Pakistan.

Figure 3.1: Unemployment Rate in Pakistan

Source: Pakistan Bureau of Statistics

26
 Theoretical framework is carried out on the based on previous studies

(literature review) that is presented in the form of diagram given below (3.2 figure).

This diagram shows the relationship among the unemployment and other variables

such as domestic investment, foreign direct investment, money supply, exports and

population growth in the present study.

 Foreign direct investment

 Domestic Investment

 Money supply
Unemployment rate
 Exports

 Population

Independent variables Dependent variable

Figure 3.2: The role of macroeconomic variables in the determination of

unemployment of Pakistan

3.3 Model Specification

To predict and analyze, an economic model is composed and it shows economic

situation of various units under some abstraction and assumptions. Because when we want to

quantify the economic phenomenon then we require a model. There are many other studies

which includes different variables such as inflation rate, gross domestic product, exchange

rate, literacy rate, interest rate, population, employment and foreign direct investment, etc.

(Irpan et al,2016; Zeb,2014; Khan and Zahra,2016). But this study examines the role of

foreign direct investment and domestic investment in determining the level of unemployment

rate of Pakistan. This study will utilize the time series data within time period of 1974 to

2016. The Data collection sources are World Bank online database and Pakistan Economic

Survey. The analysis of this study consists of six variables from which five variables namely

foreign direct investment, domestic investment, exports, money supply and population growth

27
are treated as explanatory variable and unemployment rate is treated as explained variable.

The functional form of the model is:

UNEMt= f (LFDIt, DIt, M2,LEXP,POPgrt)

UNEM= Unemployment rate

LFDI= Logarithm of foreign direct investment

DI= Domestic investment

M2= Money supply

LEXP=Logarithm of exports

POPgr = Population growth

𝜀𝑡 =Error term

t = Years

3.4 Description of Variables and their Relationship with

Unemployment Rate

3.4.1 Foreign direct Investment (FDI)

Foreign direct investment (FDI) is an investment from foreign investors to a

country. When the foreign direct investment flows into the country increase, it will

create more job opportunities to local citizens. Therefore, it will decrease the

unemployment. Besides, if there are political problems in an economy than the

foreign direct investment will decline because the foreign investors withdraw their

assets or investment from the nation. When the foreign direct investment is going to

decrease than the level of unemployment sharply increases. In this way the

relationship between unemployment and foreign direct investment is negative. But

some studies found that its effect can be varying from nation to nation. In some

economies it has positive impact on unemployment.

28
 It is not disputation that the foreign direct investment inflow has positive

impact on the unemployment as it depends on whether the foreign direct investment is

a brown field investment and green field investment(Bayer,2014).Turkey has more

focus on the acquisitions and privatization because it is under the category of brown

field investment. It means that the foreign direct investment does not generate

employment in Turkey. In contrast, to improve the economic condition of a nation,

there is need to focus more on improving the green field investment by utilizing high

level of technology than there is many spillover effects in the long term(Balcerzak

and Zurek,2011).

3.4.2 Domestic investment (DI)

Domestic investment can be defined as investment in the products and

companies of someone’s own nation rather than in foreign countries. The domestic

investment usually supposed to expand the development of economic zones and

improve the domestic climate of investment. However, both domestic and foreign

investment closely related. Van Loo. (1977) explored the impact of foreign direct

investment on total investment/domestic investment in Canada. The estimates of

Van’s study suggested that there is positive relationship between FDI and domestic

investment through the direct effect but the domestic investment is smaller due to

negative indirect impact.

Lipsey (2000) explored that the inward foreign direct investment is negatively

related to domestic investment in the OECD countries. While indirectly the foreign

direct investment effects economic growth through increasing the stock of human

capital in the host country. The larger the aggregated knowledge, the faster advanced

technological progress because the innovation cost decrease as the level of knowledge

increase (Campos and Kinoshita, 2002; Findlay, 1978; Wang, 1990). The foreign

29
direct investment crowds out the domestic investment in some situations because it is

not necessary that foreign direct investment is always favorable for domestic

economy (Ricardo and Agosin, 2000).

3.4.3 Money supply (M2)

Money supply in the present study indicated the broad money that includes

currency, demand deposits, savings accounts, short term deposits, treasury bills, etc.

The supply of money is controlled by the central bank. Wright et al. (2009) found that

money supply, interest rate and unemployment are positively related to each other in

the long run. Arshad and Ali (2016) explored the trade-off between rate of interest

and unemployment rate. Therefore, the supply of money is closely related to

unemployment rate and the present study includes it to check this affect in Pakistan

economy.

3.4.4 Population Growth (Popgr)

Population growth rate is another important indicator which is used to explain

the change in population over time and play a focal point in the economic

development of a nation. Rapid population growth can generate problem of food

security, urban congestion and environment problem and it is the major factor behind

the international migration. Maqbool et al. (2013) take population among the major

determinants of unemployment in Pakistan. Hollister and Goldstein (1994) explored

that high population growth rate resulted in increase in supply of labour force. As a

result, the unemployment rate decreases. However, the increase in population also

increases the demand for goods and services that may result in raising aggregate

demand in the economy. Such rise in aggregate demand may be followed by the

investors and the total production of the economy may increase. Therefore, large

population may not be a danger to the unemployment rate of the economy.

30
3.4.5 Exports of Goods and Services (EXP)

Trade is the engine to economic growth in this era. The exports play a vital

role in the progress of an economy. Mehta (2014) examined the determinants of the

economic growth and found exports among the major determinants. The rise in

exports may expand the related industry that in turn increase the employment in that

industry and reduce the unemployment rate of the economy. Therefore, the study

expects the negative sign for the exports of goods and services to affect the

unemployment rate of Pakistan. However, the logarithm of exports is included in the

empirical analysis that converts the exports in millions into the percentage.

31
 CHAPTER 4

ECONOMETRIC METHODOLOGY

4.1 Introduction

In this chapter the econometric techniques and tests used in the present study

are briefly discussed. The necessary details about the tests and their null hypothesis

are also provided. Since the data used is time series from Pakistan economy over the

period from 1976 to 2016. Therefore, the first check is the stationarity test that is also

named as the unit root test. However, the econometric model for the present study is

discussed before proceeding further.

4.2 Econometric Model

To analyze and predict, an economic model is constructed and economic

model shows economic situation of different units under some assumptions and

abstraction. This study explores the role of domestic investment and foreign direct

investment in determining the unemployment level of Pakistan. This study used the

time series data within time period of 1974 to 2016.Data has been collected from the

database of World Bank and various issues economic surveys of Pakistan. The

analysis of this study started from simple regression model with six variables from

which five variables namely exports, money supply, population growth, domestic

investment and foreign direct investment are treated as regressors and unemployment

rate is treated as regressand. The functional form of the model is:

UNEMIt= f (POPgrt, LEXPt,M2t, LFDIt, DIt,)

LFDI= Logarithm of foreign direct investment

POPgr= population growth

UNEM= unemployment rate

32
DI=domestic investment

LEXP= Logarithm of exports

M2=money supply

To bring in line with the assumption of linear regression which states that the

variables must be normally distributed the data is log transformed by taking log of the

variables in the data. Log linearization of the data also helps to decrease the chances

of expected hetroscedasticity in the data and provides better estimation results. After

converting data into log form the model of the study can be represented as:

UNEM𝑡=𝛽°+𝛽1𝐿EXP𝑡+𝛽2𝐿FDI𝑡+𝛽3𝐿DI𝑡+𝛽4POPgr𝑡+𝛽5𝑀2𝑡 + 𝜀𝑡

In the above equation LFDI is the log of FDI, UNEM is unemployment rate,

DOI is domestic investment, popgr is the population growth rate, M2 is the money

supply and LEXP log of exports. 𝜀 represents the random error.

4.3 Unit Root Test

In this study, unit root test applied to check whether the series are stationary or

non-stationary. To avoid the spurious and invalid results, it is important to test unit

root test before estimation.

There are three cases of this test given below:

When 𝛽 > 1, 𝑌𝑡 𝑖𝑠 𝑎𝑛 𝑒𝑥𝑝𝑙𝑜𝑠𝑖𝑣𝑒 𝑝𝑟𝑜𝑐𝑒𝑠𝑠

When 𝛽 = 1, 𝑌𝑡 𝑖𝑠 𝑎 𝑢𝑛𝑖𝑡 𝑟𝑜𝑜𝑡 𝑝𝑟𝑜𝑐𝑒𝑠𝑠(𝑛𝑜𝑛 − 𝑠𝑡𝑎𝑡𝑖𝑜𝑛𝑎𝑟𝑦 𝑝𝑟𝑜𝑐𝑒𝑠𝑠)

When 𝛽 < 1, 𝑌𝑡 𝑖𝑠 𝑎 𝑠𝑡𝑎𝑡𝑖𝑜𝑛𝑎𝑟𝑦 𝑝𝑟𝑜𝑐𝑒𝑠𝑠

According to Dawn and Gujrati (2009), the stationarity means that the mean

and variance are constant over time. However, if variance and mean are not constant

over time, it will become non-stationary. When there is problem of non-stationary in

the data then it will lead to spurious results or spurious regression. It means that two

33
variables are trending over time, a regression of one on other could have a high R-

Square even if two are totally unrelated (Engle and Granger, 1987) and it also can

prove the analysis assumption is invalid when the variables in the model are non-

stationary. The hypothesis test will be rejected if normally t-ratios are different from t-

distribution.

4.3.1 Hypothesis

Ho: Non-stationary (There is unit root problem exist.)

H1: Stationary (Not existence of Unit root)

The rule of decision: Reject Ho if P-value is less than the level of significance,

otherwise don’t reject.

4.4 The Augmented Dickey Fuller Test (ADF)

To predict and analyze macroeconomic model, the tools of econometric are

applied. As the inclusion of time trends can make the time series data non-stationary

and thus the regression may give the spurious results. As Plosser and Nelson (1982)

stated that there is unit root problem in time series data. To overcome the problems of

non-stationarity in the data, there are various tests that can be utilizing to check the

data stationarity. This study will also use Augmented Dickey Fuller unit root test to

check data stationarity. Moreover, sometimes stationary time series can also face

temporary shocks which vanish for the time being but in long run they move back to

their mean values. To overcome such problems there are several tests that can be used

to make the data stationary. This study uses Augmented Dickey Fuller unit root test to

make the data stationary.

34
 This test was developed by Dickey and Fuller (1981) when they found that

error terms are correlated. Augmented Dickey Fuller test is conducting by augmenting

the equation by adding the lagged value of the regressand. (∆𝑌𝑡)

This model constant with trend:

∆𝑌𝑡 = 𝛽1 + 𝛽2𝑡 + 𝛿𝑌𝑡 − 1 + ∑ 𝑎𝑖∆𝑌𝑡 − 1 + 𝜀𝑡

𝑖=1

This model is constant without trend:

∆𝑌𝑡 = 𝛽1 + 𝛿𝑌𝑡 − 1 + ∑ 𝑎𝑖∆𝑌𝑡 − 1 + 𝜀𝑡

𝑖=1

4.4.1 Hypothesis

H0: δ = 0 non-stationary time series; so there unit root problem exist.

H1: δ < 0 stationary time series.

The rule of decision: Reject Ho if P-value is less than the level of significance,

otherwise don’t reject.

4.5 Cointegration

According to Dawn and Gujrati (2009) if two variables have equilibrium or

long run relationship between them than they are Co integrated. The reason of

applying co integration method is to test whether a group of series is co integrated or

not. For example, if variable X (income) and variable Y (consumption) are integrated

at order one I (1) Variables, variable Z explain as [income-consumption] will be

integrated at order zero I(0).

In this study we used the Autoregressive distributed lag model for finding the

long run Cointegration among the variables. By Applying OLS and computing τ

statistic of the estimated coefficient of Xt–1 and comparing it with the Dickey Fuller

35
(1979) critical τ values, if the calculated value of τ statistic is greater than the critical

value then reject the H0. In this case the time series data is stationary. On the other

hand, if we fail to reject H0, the series is non-stationary. Thus by applying this

method on all the variables, we can easily find their respective orders of integration.

4.6 The Autoregressive Distributed Lag (ARDL)

Autoregressive Distributive Lag Bound testing approach presented by Pesaran

and Shin (1997). This approach has many advantages and it is a better method of

Cointegration than the traditional method. Due to the following reasons ARDL is

regarded as a better method.

a) ARDL gives ingenious and accurate comprehensive information regarding the

structural break of data.

b) ARDL can be applied no matter what the order of integration.

c) ARDL bound testing approach can be employed even the sample size is small.

d) In order to detain the data generating process in a general to specific modeling

framework ARDL permit to take the adequate number of lag.

This method is based on unrestricted vector error correction model (UVECM)

is superior to traditional method as it has better short run and long run equilibrium

properties. After taking lag in ARDL process one can proceed to identification and

estimation by using OLS test. Eventually inferences can be making through this long

run coalition.

Δ𝑙𝑛𝑌𝑡=𝛽1+𝛽2𝑡+𝛽3𝑙𝑛𝑌𝑡−1+𝛽4𝑙𝑛𝑋𝑡−1+𝛽5𝑙𝑛𝑍𝑡−1+⋯+Σ𝛽Δ𝑙𝑛𝑌𝑡−ℎ𝑝ℎ=1Σ𝛾𝑗Δ𝑙𝑛𝑋𝑡−𝑗

𝑝𝑗=0+Σ∅𝑘Δ𝑙𝑛𝑍𝑡−𝑘𝑝𝑘=0+⋯⋯+𝜇𝑖𝑡

First of all by application of Bound test using Wald test the study will find the

direction of relationship among the variables in case of Pakistan.

36
𝐻𝑜:𝛽=2𝛽3=𝛽4=0→ (Co integration does not exist among the variables)

𝐻1:𝛽≠2𝛽3≠𝛽4≠0→ (Co integration does exist among variables)

After the confirmation of long run Co integration among the variables. The

study uses the VECM for finding short run relationship. The VECM can be defined

as:

Δ𝑙𝑛𝑌𝑡=𝛽1+𝛽2𝑡+𝛽3𝑙𝑛𝑌𝑡−1+𝛽4𝑙𝑛𝑋𝑡−1+𝛽5𝑙𝑛𝑍𝑡−1+Σ𝛽Δ𝑙𝑛𝑌𝑡−ℎ𝑝ℎ=1Σ𝛾𝑗Δ𝑙𝑛𝑋𝑡−𝑗𝑝𝑗=

0 +Σ∅𝑘Δ𝑙𝑛𝑍𝑡−𝑘𝑝𝑘=0+𝜔𝐸𝐶𝑀𝑡−1+𝜇𝑖𝑡

4.7 Vector Error-Correction Models (VECM)

Vector Error Correction Models (VECM) is utilize when there is long run

relationship between two variables. VECM is used for forcasting long run relationship

of time series on another. This method is directly forcast the speed of explained

variable (unemployment rate) return to equilibrium after a change in explanatory

variables (LFDI, DI, Lexp m2 Lexp, pop growth).

4.8 Conclusion

This chapter discussed about the methodology that are used for exploring the

relationship between explained variable (unemployment rate) and explanatory

variables (FDI, DI, exports, money supply and population gr). Besides, this chapter

also discussed the method of data collection and data analysis. The measurements,

results and econometric test will discuss in the next chapter.

37
 CHAPTER 5

RESULTS AND DISCUSSION

5.1 Introduction

This chapter will discuss the results by using econometric methodology that

was discussed in chapter 3. In section 4.1 explains the statistics of explained and

explanatory variables. Section 4.2 describes trends of each variable. Section 4.3

explains the results of unit root test by using Augmented Dickey Fuller test. Section

4.4 presents the ARDL Cointegration test. Section 4.5 discusses the VECM results.

The interpretation will be given at below of the table that recording empirical results

of tests. Last section will conclude a briefly conclusion of the results of tests.

5.2 Empirical Results and Discussion

The empirical results of present study will be briefly discussed as follows;

5.2.1 Descriptive Statistic

Descriptive statistics is pre-requisite for analysis in time series. The function

of descriptive statistics is to summarize the data sets of all variables and find out the

pattern, trend and basic features of data sets. The descriptive statistics including mean,

median, mode, maximum, minimum, skewness and kurtosis for the study are given

below in table 4.1. The value of skewness indicates that shape of variables in the

distribution is not same. The distributions can be positively skewed or negatively

skewed (Taylor, 2016). The sign of skewness coefficient guide well in this matter.

The value of skewness of UNEM, LFDI, LNEXPORTS and DI are -0.198304, -

0.484966,-0.454227 and -0.590098 respectively, and so they all are skewed to left.

However, the skewness of population growth and money supply are 0.209621 and

0.435502 respectively that indicate they are skewed to right.

38
 To explore that whether the tail is light or heavy of the data which is relative to the

normal distribution? It refers to the Kurtosis. The categories of Kurtosis are three which are

Leptokurtic, Mesokurtic and Platykurtic. In the table 4.1, the values of Kurtosis of all the

variables are less than 3 that indicate variables are Platykurtic. Hence, the distributions of

variables are flatter than the normal distribution. However, the kurtosis values are not very far

from 3, so to find out whether the distribution approximates to normal distribution, the

Jarque-Bera test is applied. The Jarque-Bera probability values indicate that null hypothesis of

normality is accepted for all the variables at 5 percent of level of significance. Therefore, the

data is normally distributed.

Table 5.1: Descriptive Statistic

UNEMPRT GFCAPFR LNFDIINFLOW POPGR LNEXPORTS M2PERGDP

Mean 4.154651 16.15131 8.502996 2.603873 11.69215 45.11052

Median 5.370000 16.83711 8.577492 2.522482 11.78024 43.87687

Maximum 8.270000 19.23542 9.747412 3.360418 12.10990 58.86769

Minimum 0.340000 12.22065 6.602060 1.998563 11.05621 33.66790

Std. Dev. 2.719386 1.748813 0.763585 0.492842 0.338090 6.103834

Skewness -0.198304 -0.590098 -0.484966 0.209621 -0.454227 0.435502

Kurtosis 1.497669 2.420175 2.644941 1.463793 1.925927 2.383595

Jarque-Bera 4.325616 3.097902 1.911416 4.543120 3.545565 2.039999

Probability 0.115002 0.212471 0.384540 0.103151 0.169860 0.360595

Sum 178.6500 694.5064 365.6288 111.9665 502.7625 1939.753

Sum Sq. Dev. 310.5925 128.4506 24.48859 10.20154 4.800801 1564.785

Observations 43 43 43 43 43 43

5.2.2 Unit Root Test

The function of unit root is used to check whether the variables are stationary

or non-stationary. Here the null hypothesis indicates that variables are non-stationary

or have unit root. Therefore, the variables are stationary only if we have the empirical

39
evidence to reject the null hypothesis. The results of Augmented Dickey-Fuller test

are indicated in table 5.2.

Table 5.2: Unit Root Test

Variables At Level At First Difference

T-Statistic (Prob.) T-Statistic (Prob.)

LUNEM -1.4935(0.5269) -5.0886(0.0001)***

LNFDI -2.3702(0.1560) -7.9203(0.0000)***

LNEXP -1.8594(0.3477) -6.5894(0.0000)***

GFCF -2.6375(0.0939)* -5.6256(0.0000)***

POPGR -0.3964(0.9001) -4.1985(0.0021)***

M2 -1.0049(0.7424) -5.4785(0.0000)***

Note: *, ** and *** indicate significance at 10, 5 and 1 percent

respectively.
The results of Augmented Dickey Fuller (ADF) unit root test highlight that

unemployment, foreign direct investment, exports, money supply and population

growth are non-stationary at level because the probability values are more than 10

percent level of significance. However, the test statistic of domestic investment

accepts the null hypothesis of normality at 10 percent level of significance at level.

Nevertheless, all variables are able to reject null hypothesis of non-stationarity after

applying Augmented Dickey Fuller test to the first difference values of the variables.

It can be assure by the P-values of the t-statistics that is less than 0.01 that indicates

significant at 1 percent level of significance. At the 1st difference, it has enough

evidence to conclude that all variables are stationary.

40
5.2.3 Autoregressive Distributed Lag Cointegration Test

Autoregressive Distributed Lag (ARDL) model can identify whether the

Cointegration relationship among the variables exists? However, a rule of thumb

states that ARDL should be performed if some variables are stationary at level and

some are not, but all variables must be stationary at first difference. Unemployment

rate, foreign direct investment, population growth, exports and money supply are non-

stationary at level but at 1st difference these all variables are stationary. Therefore

there is mixed order of integration which supports application of Auto-regressive

Distributive lag (ARDL) Co integration Approach. Moreover, ARDL provides more

precise results in the small samples. Therefore it suits best for our analysis. For

investigating the Cointegration relationship among the variables the next step is to

check the ARDL bounds test.

5.2.4 ARDL Bound Testing Approach

ARDL bounds testing approach is applied below for investigating the Co

integration among unemployment, foreign direct investment, domestic investment,

exports, population growth and money supply. The results of ARDL Bounds testing

approach are shown in table5.3. The calculated F-statistic (6.405371) is greater than

the upper bound (4.68) at all level of significance. Therefore, the null hypothesis of no

Cointegration is rejected, which assures the Cointegration among the variables of the

model.

41
 Table 5.3: ARDL Bound test Results

F-Statistic: 6.4054***

Significance Lower Bound Upper Bound

10% 2.26 3.35

5% 2.62 3.79

1% 3.41 4.68

Note: *, ** and *** indicate significance at 10, 5 and 1 percent

respectively.

5.2.5 Estimated long run coefficients using the ARDL approach:

The ARDL bounds test approves the Cointegration among the variables of the

model, therefore we can estimate the long run and short run coefficients of the model.

The long run relationship is indicated in table 5.4 below;

Table 5.4: Long run Coefficients

Variable Coefficient Std. Error t-Statistic Prob.

GFCAPFR -0.342819 0.181348 -1.890394 0.0695

LNFDIINFLOW 5.968751 1.799332 3.317204 0.0026

POPGR -3.415974 0.942714 -3.623554 0.0012

LNEXPORTS -2.786693 3.024306 -0.921432 0.3650

M2PERGDP -0.655034 0.122852 -5.331896 0.0000

C 30.469119 28.016263 1.087551 0.2864

Note: *, ** and *** indicate significance at 10, 5 and 1 percent respectively.

From the model above, 30.469119 is the intercept of the model that explores

that average level of Unemployment rate when the level of FDI inflow, domestic

investment, population growth, exports and money supply are zero. The result of

coefficient of FDI is 5.968751 which indicates that on average, when foreign direct

42
investment inflow increases by one percent the unemployment rate increases by

5.968751 percent, ceteris paribus. There is relationship between unemployment and

foreign direct investment is positive and statistically significant at 1% level of

significance. The results indicate that if there is increase in foreign direct investment

the unemployment will also increase. Akhtar et al. (2009) also find foreign direct

investment did not reduce unemployment in Turkey. However, FDI is not in the

striking position to influence the economic growth and to decrease the unemployment

in the Republic of Macedonia. It may refer to the fact that FDI inflows have a positive

impact in the labor market, but didn’t create sufficient new jobs.

The results indicate negative and significant relationship (at 5 percent level of

significance) in domestic investment and unemployment rate. The coefficient of

domestic investment(gross fixed capital formation) it is -0.342819. It indicates that if

domestic investment increases by 1 percent then the unemployment rate decreases by

0.34 percent, ceteris paribus. The long run results show that the rise of one percentage

of GDP in gross fixed capital formation decreases unemployment rate by 0.34%. This

result is significant at 10% level of significance.

The coefficient of population growth is -3.416974 which indicate that there is

negative relationship between unemployment and population growth in Pakistan. The

results provide that 1% increase in population growth will decrease unemployment

rate by 3.41%. It is also significant at 1% level of significance. Population growth rate

is assumed to have a positive relationship with unemployment. High population

growth can raise unemployment rate if the working force is not absorbed in the

economy. However, the rise in population will certainly raise the aggregate demand,

so the price level rise and attract investors which in turn employ more labour for the

production of goods and services and the unemployment rate falls (Ali, 2013).

43
Hollister and Goldstein (1994) also found the negative relationship between

population growth and unemployment rate in case of low populated economies.

According to the model, the coefficient value of exports is -2.786693 which is not

significant. The results indicate the negative and insignificant relationship between

exports and unemployment in Pakistan. These results are same with the results of

Aurangzeb and Asif (2013) and Nyahokwe and Newadi (2013). It is because

exchange rate will affect the volume of exports. While if there is increase in the

volume of exports than output will increase which lead to increase in gross domestic

product and unemployment reduce definitely. But such mechanism seems inoperative

in Pakistan economy.

The coefficient of money supply is -0.655034, which is highly significant at 5

percent level of significance. The results highlight a rise of one percentage of GDP in

money supply will lower the unemployment rate by 0.65%. It indicates that

monetization is better to reduce the unemployment rate of the country. This result is

contrary to Wright et al. (2009).The constant is insignificant that may indicate that our

model is correctly specified and did not exclude the important variables.

5.2.6 Short run Dynamics

The given table presents the results of short run dynamics. By using vector

error correction model it explores the short run dynamics among unemployment rate,

foreign direct investment inflow, domestic investment (gross fixed capital formation),

population growth, exports and money supply in case of Pakistan. The estimates

revealed that unemployment rate and foreign direct investment inflow possess

negative and significant relationship. This result indicates that foreign direct

investment reduces the unemployment rate of Pakistan in short period of time. In the

short run domestic investment revealed positive and insignificant relationship with

44
unemployment rate, while population growth has negative and significant relation

with unemployment rate. The empirics show that there is a positive relationship

between domestic investment and unemploymentrate, while exports and money

supply are negatively related with unemployment rate in the short run. The significant

and negative coefficient (-0.451997) of ECM is theoretically correct. The value of

ECM explores the speed of adjustment from short run to long run equilibrium. The

results of ECM show that short run requires two years and a couple of months

approximately for converging in the long run.

Table 5.5: Short run Results

Variable Coefficient Std. Error T-Statistic Prob.

D(GFCAPFR) 0.038471 0.086800 0.443218 0.6611

D(LNFDIINFLOW) 1.140567 0.508927 2.241120 0.0334

D(LNFDIINFLOW(-1)) -1.169305 0.423692 -2.759802 0.0103

D(POPGR) -1.544009 0.603572 -2.558119 0.0165

D(LNEXPORTS) 0.984493 1.871280 0.526107 0.6031

D(LNEXPORTS(-1)) -4.445981 1.727858 -2.573117 0.0159

D(M2PERGDP) -0.163473 0.030110 -5.429157 0.0000

D(M2PERGDP(-1)) 0.127515 0.040321 3.162533 0.0038

CointEq(-1) -0.451997 0.101333 -4.460516 0.0001

Note: *, ** and *** indicate significance at 10, 5 and 1 percent respectively.

5.3 Diagnostic Testing

After estimating coefficients of the model it is important to check for the

reliability of estimates that is estimates are free from the econometric problems. There

are various types of diagnostic tests that fulfill this purpose. The diagnostics tests

result are given in table below for the present analysis. This research uses Breusch-

45
Pagan-Godfrey test to investigate the problem of hetroscedasticity. The null

hypothesis is that there is homoscedasticity which is accepted at 5 percent level of

significance. The results of Lagrange multiplier test of residual serial correlation

explores that there is no problem of autocorrelation in the model at 5 percent level of

significance, or in other words residuals are not serially correlated. To find out

whether the error terms of the model are normally distributed, the Jarque-Bera test is

applied, its P-value indicates that the null hypothesis of residuals normality cannot be

rejected at the 10 percent level of significance. Therefore, we conclude that the error

term of the model is normally distributed.

Table 5.6: Diagnostic Testing

Test Name Test Statistic P-value

Hetroskedasticity Breusch-Pagan-Godfrey 1.129338 0.3786

Autocorrelation Breusch-Godfrey LM Test 2.577 0.096

Normality Jarque-Bera 1.0953 0.5783

The stability test used to analyze the goodness of fit of the ARDL model. To

check the structural stability is used two test that are cumulative sum and cumulative

sum of square. CUSUM test captures the systematic changes in regression coefficients

while CUSUMSQ detain the departure of parameters from reliability. This graphs

show the long run stability of the model because test statistics are within the bound

values of a model for 5 % significance level.

46
 16

12

-4

-8

-12

-16
90 92 94 96 98 00 02 04 06 08 10 12 14 16

CUSUM 5% Significance

Figure 5.1: Cumulative Sum of Recursive Residuals

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4
90 92 94 96 98 00 02 04 06 08 10 12 14 16

CUSUM of Squares 5% Significance

Figure 5.2: Cumulative Sums of Squares of Recursive Residuals

47
5.4 Conclusion

This chapter discussed about the empirical results that explores the

relationship between explained variable (unemployment rate) and explanatory

variables (FDI, DI, exports, money supply and population gr). Firstly unit root test has

been applied to check the problem of stationarity. After it, bound test has been applied

to check the existence of long run relationship. The null hypothesis has been rejected.

Later, the long run and short run coefficients are estimated using autoregressive

distributed lag model technique. The diagnostics tests are applied to verify the

estimated results which ensure reliability and stability in the estimates.

48
 CHAPTER 6

CONCLUSIONS AND POLICY RECOMMENDATIONS

6.1 Introduction

The purpose of this study is to explore the relationship among unemployment

rate and other macroeconomic variables which are FDI, domestic investment,

population growth, exports and money supply. This chapter discusses conclusion,

policy recommendation and limitations.

6.2 Conclusion

Since Pakistan is a developing nation, to become a developed nation thus

Govt. and policymakers take into account in the rise in unemployment rate, the

development of Pakistan’s economy is rely on the young generation. The young

people hold high education certificate which can use their experience, skills and

knowledge to change the future and better economic growth of a country.

Unemployment is very important factor that has direct effect on the economic growth

of a nation. This study centers the unemployment rate of Pakistan and explained it in

the perspective of various macroeconomic factors. The estimation model includes five

independent variables which are FDI, domestic Investment, population growth,

exports and money supply while unemployment rate is treated as dependent variable.

The analysis is based on Pakistan economy for the period of 1974 to 2016. This study

has briefly analysed distribution of every variable. The investigation has made on the

stationarity of variables to avoid the spurious regression, the unit root test has been

applied. At level, domestic investment has become stationary, but all other variables

are stationary at 1st difference. After that this study used the ARDL Cointegration test

to figure out the long run relationship among the variables. All the variables have

49
negative relationship with the unemployment rate expect FDI. It has positive relation

with unemployment rate in Pakistan economy. To check the heteroskedasticity,

Breusch-Pagan-Godfrey test is used, the serial Correlation LM test has used for

autocorrelation, CUSUM and CUSUMSQ for the stability of the model and the

normality of the residuals has investigated using Jarque-Bera test.

This study revealed negative relationship between exports and unemployment

rate that spotlight rise in exports can play key role in decreasing the unemployment

rate of Pakistan. This study has explored that money supply also has a negative

relationship with unemployment rate which emphasis the need of monetarization in

the economy to reduce the unemployment rate to a considerable extent. The

relationship between population growth and unemployment rate is negative. These

negative relations have indicated that rise in exports, monetarization and population

growth may be helpful in decreasing the unemployment rate of our country.

The results revealed there is a negative and significant relationship between

unemployment rate and domestic investment. It means that when there is an increase

in domestic investment, unemployment will decrease at the same time. Therefore,

domestic investment can play pivotal role in reduction of unemployment rate of

Pakistan. The study has found positive relationship between foreign direct investment

inflows and unemployment rate. This is because of utilization of new method of

production. The reason behind this relationship is that the foreign investors use their

own labor and used advanced technology rather than using host country’s labor. So,

the unemployment in host country will increase by increasing the foreign direct

investment. This study concludes that foreign direct investment cannot be considered

as the angel to reduce the unemployment rate rather it can worsen the existing rate of

50
unemployment in Pakistan. The empirics suggest to rely on domestic investment to

reduce the unemployment rate of Pakistan.

6.3 Policy Implications

To enhance the domestic investment, government intervention and decision

making are very important. In order to overcome the problem of unemployment,

government must adopt some policies to increase the domestic investment. There is

entire need of appropriate policies to enhance the domestic investment which can

attract investor to invest in their owns country. Availability of appropriate policies can

make the confidence of domestic investors to invest in their own country. When the

domestic investment increase then the exports will also be increased and when exports

increases than unemployment rate decreases.

The relationship between population growth and unemployment rate is

negative. The negative relationship indicates that rise in population than the labor

supply increase and investment will increase and unemployment decreases. The

government should provide more job opportunities and establish plants in backward

areas and employ disguised labor in industries. It will boost up the aggregate demand

which lead to lower unemployment rate (Pettinger,2012).

6.4 Limitations of Study

This study is conducted to check the role of FDI and domestic investment in

determining the unemployment rate of Pakistan. Since there are few studies which

have no difficulties and limitations during the progress of the research, some

limitations has been found in this study. Firstly, the data has been collected from

World Bank and data of unemployment rate is collect from economic survey of

51
Pakistan. The analysis may provide different estimates if the data is compiled from

any other database.

There may still be a lot of relevant variables which can be include in the

model such as GDP, inflation rate, interest rate, exchange rate and corruption but in

this study six variables are included which are most relevant which are FDI, domestic

investment,population ,money supply and exports used as regressors while

unemployment rate is treated as regressand.

Moreover, This study may not be applicable for other nations except Pakistan.

It is because all the estimates from this study might only be applicable in Pakistan due

to country background, economic performance and government policies will have

large differences. Hence, this study may be a reference to other countries.

6.5 Recommendation for Future Research

Recommendations are very important part that provides suggestion to avoid

repeated mistakes and have good findings in future study. Therefore, it is highly

recommended that researcher can add more variables which are most relevant while

carrying out same study since there is hardly any work on this research because a

variable or group of variables shows the characteristics of an individual in the model

and also the environment of research. Furthermore, this research can give a guideline

to other researchers that focus to explore more studies in this field.

52
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 APPENDICES

Appendix A

4.2.2 Graph Line

Unemployment rate
Unemployment Rate UNEMPRT

0
1975 1980 1985 1990 1995 2000 2005 2010 2015

Foreign Direct Investment

Log(FDIINFTOT) LNFDIINFLOW

10.0

9.5

9.0

8.5

8.0

7.5

7.0

6.5
1975 1980 1985 1990 1995 2000 2005 2010 2015

61
 Domestic Investment

Gross fixed capital formation (% of GDP) GFCAPFR

20

19

18

17

16

15

14

13

12
1975 1980 1985 1990 1995 2000 2005 2010 2015

Population growth:

Population growth (annual %) POPGR

3.4

3.2

3.0

2.8

2.6

2.4

2.2

2.0

1.8
1975 1980 1985 1990 1995 2000 2005 2010 2015

62
 Money supply:

Broad money (% of GDP) M2PERGDP

60

55

50

45

40

35

30
1975 1980 1985 1990 1995 2000 2005 2010 2015

Exports:

Log(EXPORTSLCU) LNEXPORTS

12.2

12.0

11.8

11.6

11.4

11.2

11.0
1975 1980 1985 1990 1995 2000 2005 2010 2015

63
 APPENDIX B
Breusch-Godfrey Serial Correlation LM Test:

F-statistic 2.577305 Prob. F(2,25) 0.0960

Obs*R-squared 7.008514 Prob. Chi-Square(2) 0.0301

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 1.129338 Prob. F(13,27) 0.3786

Obs*R-squared 14.44139 Prob. Chi-Square(13) 0.3435

Scaled explained SS 11.61344 Prob. Chi-Square(13) 0.5596

Covariance Analysis: Ordinary

Date: 02/24/19 Time: 18:14
Sample: 1974 2016
Included observations: 43

Correlation
t-Statistic
Probability UNEMPRT GFCAPFR LNFDIINFLOW POPGR LNEXPORTS M2PERGDP
UNEMPRT 1.000000
-----
-----

GFCAPFR -0.265602 1.000000

-1.764039 -----
0.0852 -----

LNFDIINFLOW 0.795213 -0.167257 1.000000

8.397824 -1.086270 -----
0.0000 0.2837 -----

POPGR -0.887246 0.449946 -0.822804 1.000000

-12.31559 3.226068 -9.270244 -----
0.0000 0.0025 0.0000 -----

LNEXPORTS 0.867522 -0.294438 0.948133 -0.880824 1.000000

11.16778 -1.972778 19.09882 -11.91277 -----
0.0000 0.0553 0.0000 0.0000 -----

M2PERGDP 0.549276 -0.216571 0.839975 -0.722731 0.805222 1.000000

4.208843 -1.420440 9.911944 -6.695907 8.695064 -----
0.0001 0.1630 0.0000 0.0000 0.0000 -----

64
 APPENDIX C

5.3 Test of Normality

Figure 5.3: Normality test graph

8
Series: Residuals
7 Sample 1974 2016
Observations 43
6
Mean 4.26e-15
5 Median -0.025671
Maximum 1.646167
4 Minimum -1.569499
Std. Dev. 0.833753
3 Skewness -0.064727
Kurtosis 2.228906
2

Jarque-Bera 1.095325
1 Probability 0.578300

0
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

65